Since financial planning involves so many areas (such as investments, insurance, taxes, and retirement) people naturally get confused about different strategies and laws. Here are a few common misperceptions, or myths, that consumers have regarding finances.
Long term care coverage. Many people think that our government will pay for their long term care, which is not true. Medicare (which covers most retirees) does not pay for long term care, but it does have a limited coverage for rehabilitation after some hospital stays. Medicaid (which covers financially indigent retirees) has some long term care coverage, but only for people with almost no assets. The vast majority of us will need to pay for this need ourselves or with policies we obtain ahead of this type of event.
Gifts to a family member. Making a gift or leaving your estate to your heirs does not ordinarily affect income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions), and your family member will not have to pay income taxes from your gift.
Taking retirement withdrawals before 59 ½. This can be done. IRS has a rule called a 72(t), which is essentially a system for early distributions. By using IRS's rule 72(t) it eliminates the 10% early withdrawal penalty normally due for distributions prior to age 59/12 as long as you follow their instructions.
Electing to take early social security benefits while working. If you elect to take benefits early and you keep working, the amount of your benefit can be reduced. This reduction will continue until the year you reach full retirement age (between 66 and 67 for most workers). In 2017, Social Security reduces benefits by $1 for every $2 of earned income above $16,920.
Finding a “risk free” investment. Actually, there is no investment with this option- it does not exist. Most people who have lived through the “great recession” of 2008 are understandably afraid of losing their money-that is called market risk. Inflation, which is the loss of purchasing power, is a risk just as important for very conservative investors. In essence, if you don’t earn enough to keep up with the rate of inflation you lose the ability to purchase the same amount of goods and services with your investments.
If you didn’t know the inaccuracy of these myths, don’t feel badly. Most people cannot keep up with all of these areas. That is why Certified Financial Planners® are trained, and experienced to provide advice in all of these areas.
Paul Marks CFP®, CRPS®
Van Sievers CFP®, CPA